December 19, 2012 4:48 pm

Insurers struggle to raise premiums

New York - cars that were uprighted and submerged by Superstorm Sandy©AP

Insurers are still struggling to increase premiums in spite of claims resulting from superstorm Sandy, which Lloyd’s of London said on Wednesday had the potential to become the market’s third-costliest disaster in its 324-year history.

Overall global rates ticked up only 1.2 per cent in the final quarter of the year – when Sandy struck – lower than the 1.4 per cent rise in the previous three months, according to research from the broker Marsh.

The analysis came as Lloyd’s estimated it would face claims of between $2bn and $2.5bn from Sandy, which it said implied losses across the insurance industry of between $20bn and $25bn.

At the top end of the range, only hurricane Katrina in 2005 and the US terrorist attacks in 2001 would be more costly for Lloyd’s in absolute terms.

Sandy is set to account for about a third of the total $65bn in losses that insurers face from catastrophes in 2012, according to separate estimates Swiss Re issued on Wednesday.

The worst US drought in decades, which parched crops across the country’s farm belt, would cost insurers about $11bn, the reinsurer estimated.

The total expected 2012 disaster losses was little more than half of the $120bn the industry endured the previous year, but was still above the average of the past decade.

The insurance industry is set to cover less than half of the estimated $140bn cost to the global economy in 2012 arising from disasters, Swiss Re estimated.

Insurance and reinsurance companies traditionally respond to big payouts by passing on increased costs to policyholders.

However, Richard Ward, chief executive of Lloyd’s, said the market overall remained “financially strong” in spite of Sandy and the series of catastrophes last year.

This is partly because investors remain willing to provide capital to insurers given weak prospective returns elsewhere.

The latest example of fresh capital came on Wednesday when Tower Group, the Nasdaq-traded US insurer that holds an 11 per cent stake in Lloyd’s insurer Canopius, said it was putting in an additional £114m into the market.

As a result of the decent capitalisation across the industry, insurers that attempt to increase prices can be undercut by well-funded rivals.

Marsh said premiums had been largely stable for lines of insurance not exposed to catastrophe risks during the fourth quarter – and fell in many countries other than the US.

Still, the broker said rates for catastrophe-exposed US property rose by as much as 10 per cent in the fourth quarter and warned that the full impact of Sandy would not be felt until the first half of next year.

Meanwhile, rates for financial and professional insurance lines rose by an average 2.2 per cent year-on-year.

Marsh said the rises for financial institutions reflected “insurers’ concern about the global economic situation and increased regulatory scrutiny” of the sector.

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